Lol this Jonathan Tepper has received way too much attention in Oz, the guy is a joke. Reminds me of another foreign economist scaremongering a few years ago in one Harry Dent. He could not have been more wrong. Predicted a huge crash right before the boom. JT's methods are flawed as his claims completely ignore the large amounts of funds in Australian offset accounts and businesses which actually leave us in pretty safe territory all things considered. A 50% drop did not even happen in the recession years with high interest rates and slower population growth. Australian economists have already ripped him a new one and sent him packing, the clown got his 5 minutes of fame which is all he wanted. Don't give him anymore.

If you dig behind the analysis in this story it is clear they aren't comparing apples with apples.

The basic idea is that average house prices have risen at three times the rate of growth in average income, therefore this is unsustainable and is a bubble that is about to burst. But how do they define what they are analysing?

'Average' House Price

Average house price is determined by the ABS as being the total value of Australian housing stock, divided by the number of dwellings (6416.0 - Residential Property Price Indexes: Eight Capital Cities, Sep 2015). This does not reflect the fact that the average Australian dwelling size is 40% larger today is it was in 1980 (Australian houses are getting bigger). In other words, 40% of the price gain since 1980 simply reflects the fact that you now get more house when you buy the 'average' house. To make a fair comparison, they should have analysed the gain in price on a square metre basis, which would eliminate half of the gain that they are worried about.

Houses are also better quality today than a generation ago - including better materials and finishes, features like air conditioning etc. The ABS does account for some of this through a Constant Quality Real Housing Price Index, but as I understand it they don't adjust for average size.

One of the best things we could do for housing affordability would be to reform planning regulations so that we stop churning out McMansions and build housing of a more realistic size - but that is a different debate. Besides, I think the increase in average home size can't go on forever, and houses are unlikely to become 40% larger again over the next 30 years. As apartment and townhouse living becomes more common, this should counteract this effect a little over the next generation.

'Average' Incomes

In terms of income, this is defined as average household disposable income. As we have moved from a single to a dual income society over the past generation or two, that has increased the average household income and driven up prices. Prices have, however, climbed faster than the growth in household income from women joining the workforce in greater numbers and earning increasingly higher incomes.

Again, we can have a debate about whether we as a society have just been chasing our own tail for 40 years, with it now requiring two incomes to achieve the lifestyle that was previously possible on one income, but with two adults now needing to work rather than one. But in any case, I think this effect simply reflects the fact that the capacity of a dual income family to service debt is more than twice as high as a single income family, due to the risk reduction that comes from diversifying the family's income.

Problem in Perspective

So, if you adjust for larger and better quality 'average' houses, and the structural change that comes from a dual-income society, then the gap between average housing cost and average income is probably only half as bad as reported. These are also one time structural changes, so it would be wrong to project that growth into the future. The interest only mortgage/offset account feature of Australian mortgage lending in the past 10-15 years, which others have mentioned, probably means the true debt level is also a bit lower than reported as well because offset funds aren't counted.

This does not reflect the fact that the average Australian dwelling size is 40% larger today is it was in 1980 (Australian houses are getting bigger). In other words, 40% of the price gain since 1980 simply reflects the fact that you now get more house when you buy the 'average' house.

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This presumes that the gain in the value is due to the size of the house and not the location (i.e. land value). Based on the available information, construction cost increases have not materially appreciated. You can easily compare the cost of producing a house of size 'x' 40 years ago with a house of size 'y' now. Perhaps the differences aren't attributable to the raw size, based on the construction costs already provided.

Houses are also better quality today than a generation ago - including better materials and finishes, features like air conditioning etc. The ABS does account for some of this through a Constant Quality Real Housing Price Index, but as I understand it they don't adjust for average size.

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I think this is a bit.... hand-wavy. At the very least it isn't empirical. I'd wager you could fit-out an old house with modern 'appliances' and be well under the cost being charged today.

In terms of income, this is defined as average household disposable income. As we have moved from a single to a dual income

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I think this is a myth. While there is a greater participation rate for women in the modern age, they are more likely to be working part-time than full-time.

I think you've provided some good talking points, however, and do believe you're correct in the premise; comparing x to y is wrought with difficulties.

There is a huge bubble. I agree. Its going to be completely disastrous. If anyone is offloading properties for 20-30% before the markets get really bad please message me. I'll help take those disasters off your hands.

There is a huge bubble. I agree. Its going to be completely disastrous. If anyone is offloading properties for 20-30% before the markets get really bad please message me. I'll help take those disasters off your hands.

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If want those head to the better suburbs of Perth.....Sydney is next. The timing if the Neg changes is going to be bad for Sydney in particular and also inner Melbourne.

HI @sash I was being a little facetious with the whole bubble thing. But yeah I am waiting for more confirmation signs that Perth has hit bottom or close to bottom before I start buying there.

With regards to Sydney.. I think the people who waay overpaid for stock will be hit the hardest and those will be the deals I'm looking to pick up when that eventually happens. I purchased over 3.5mil of property in Sydney over the last 3-4 years but I don't expect any down drift in prices to affect me much. I made sure they were all BMV and I have added value to all of them except 1. Its the people who bought the wrong stock, at the wrong price, in the wrong locations that will be hit the most and to varying degrees. Just my opinion.

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